What does the EU Green Deal Industrial Plan mean for climate tech?
Breaking down the four pillars of this game-changing initiative.
By: Rickard Vernet
The new EU Green Deal Industrial Plan promises to fuel Europe's climate companies in their scaling up of manufacturing capacity and supply chains, but many uncertainties still need to be addressed around how it will cut through the red tape that has slowed down the rollout of green technology. Join Rickard, our in-house General Counsel, below as he breaks down what we know about this exciting initiative and how it will likely affect climate tech in Europe and beyond.
When the US announced the Inflation Reduction Act (IRA) in 2022, it was largely met with praise for its promise to speed up the adoption of emissions reduction technology. Still, it was also criticised for its potential to hurt green industry in other parts of the world because all IRS subsidies are limited to parts and products manufactured in the US. The European Union, in particular, has been vocal about concerns that companies will move their production to the US to benefit from subsidies to the American market. The concern is not entirely unfounded since Volkswagen has already moved production of its electric ID.4 over to Tennessee, and the carbon capture giant Climeworks is also eyeing a US expansion.
Not to be outdone, the European Commission has now announced its response to the IRA in the form of the Green Deal Industrial Plan (GDIP) with the specific purpose of scaling up manufacturing capacity and supply chains. The GDIP should in turn be understood as an integral part of the wider EU Green Deal which includes e.g. the Green Deal Investment Plan launched in 2020 (confusingly, the Green Deal Investment Plan is abbreviated “EGDIP”, so it makes sense to refer to it as the “Sustainable Europe Investment Plan” (SEIP) instead).
The first news we got was that a reported €250 billion is being put in play, and several interesting legal and policy moves are proposed to support the green industry in Europe. Sounds exciting, right? So we set out to look a little closer at what the GDIP will include and how it can affect climate tech companies and founders.
After reading through the Commission’s communication (the full text can be found here) it is clear that the GDIP is quite a different beast compared to the IRA, and consists of a large number of references to existing initiatives and legislative acts coupled with the Commission’s ambitions for future projects. The plan has already been criticised for being quite vague on details and important aspects (such as the exact meaning of “net-zero” technologies), and is for example silent on the role of nuclear (and fusion). The devil is truly in the details here, and hopefully those details will be somewhat clearer after the first rounds of discussions between the lawmakers already undergoing in Brussels.
The plan has four communicated pillars (each including a number of initiatives), and we will look at each of them below:
a predictable and simplified regulatory environment;
faster access to sufficient funding;
open trade for resilient supply chains.
Cutting the red tape
Complaining over rigid and complex regulations, slow processes, and byzantine bureaucracy has been a popular sport among EU-bashers for decades. One of the key goals for the Commission with the GDIP is to enable a simple, predictable and clear regulatory environment. During spring 2023, the Commission will table three key proposals:
A Net-Zero Industry Act: intended to provide a simplified regulatory framework for the production capacity of key products, such as batteries, windmills, heat pumps, solar, electrolysers, carbon capture, and storage technologies. There are yet to be sector-specific goals or strategies, however, so it remains very much to be seen how this will play out for different sectors and who will be able to benefit.
The Commission also stresses the importance of setting European technology standards for showing marketability and drawing interest for investments (examples given are standards for recycling of raw materials for solar panels or the installation of wind turbines), and using public procurement to stimulate the demand for net-zero products but no specific details are given on how this will be achieved.
Critical Raw Materials Act: intended to ensure sufficient access to those materials, like rare earths, that are vital for manufacturing key technologies. There is very little information on this new act in the GDIP communications so far, and it will indeed be especially interesting to follow the intersection between the increased opportunity of raw material extraction and the proposed EU Nature Restoration Law and the COP 15 Global Biodiversity Framework (GBF) aiming to protect ecosystems and biodiversity.
Reform of the electricity market design: intended to make consumers benefit from the lower costs of renewables (public consultation is currently ongoing) and a proposed reform will be presented in March.
In addition to these three core initiatives, the Commission also highlights recent initiatives in supply chain and consumer rights (e.g. new regulatory framework for batteries and the Ecodesign for Sustainable Products Regulation) as critical for the green transition. Also, it stresses the importance of rolling out infrastructure (charging and refuelling infrastructure, smart electricity grids and hydrogen backbone).
Speeding up access to funding
The Commission highlights that the EU industry is strong in some sectors, such as wind energy and heat pumps, but weaker in e.g. solar PV panels. It also stresses that the EU’s competitiveness is being challenged, not least by heavy subsidising in third countries. To meet the challenges, the Commission wants to open access to more and quicker funding for the deployment of net-zero industry by individual member states, as well as by the EU and by private actors.
On the national funding level, the core idea is to simplify and relax EU state aid rules. Normally state aid rules - which are core to the EU single market - restrict individual member states from distorting competition by subsidising and aiding businesses, but the GDIP sets a clear shift in policy and would allow individual member states to provide significant support to green industry. The GDIP lists five topics for the simplification and relaxation of state aid rules (some of which are not super clear right now but will need to be fleshed out):
renewable energy deployments (including hydrogen and biofuels);
decarbonising industrial processes (where aid can be based on standard percentages of investment cost);
strategic net-zero technologies (to match the aid received for similar projects by competitors located outside of the EU);
major new production projects in strategic net-zero value chains, taking into account global funding gaps;
a revision of the General Block Exemption Regulation, increasing notification thresholds for support for green investments in general and specifically for so-called Important Projects of Common European Interest (IPCEI).
The EU currently has five approved IPCEIs: two in batteries and two in hydrogen, with more projects in preparation (on batteries and hydrogen, or possibly solar or heat pumps).
Funding at the EU level is made available through the existing RePowerEU, InvestEU and Innovation Fund programs.
The RePowerEU program includes approximately EUR 250 billion in available loans and grants, including the remaining so-called RRF (Recovery and Resilience Facility) loans and grants originally put in place to counter the effects of the Covid-19 pandemic. Details on how to request RRF funding under the RePowerEU program can be found here (spoiler alert, it’s quite technical).
The InvestEU program (an important part of the 2020 SEIP) makes available guarantees to catalyse private investments in net-zero tech and industrial innovation. Examples of projects that can be supported are RDI of battery technologies, critical raw materials recycling, demonstration plants for manufacturing materials in the supply chain of electric vehicle batteries, hydrogen propulsion technologies, innovative advanced biofuels plants, and advanced manufacturing technology equipment in steel processing. The available guarantees of EUR 26.2 billion should be able to mobilise over EUR 372 billion of financing. By the end of 2023, almost EUR 15 billion of the EU guarantee needs to be committed.
The Innovation Fund supports the development and first-of-a-kind deployment of technologies and solutions that will decarbonise energy-intensive industries, boost renewable energy and energy storage (including batteries and hydrogen), and strengthen net-zero supply chains by supporting the manufacturing of critical components for batteries, wind and solar energy, electrolysers, fuel cells and heat pumps. Over the decade, an estimated EUR 40 billion will be available under the Innovation Fund. The Commission is looking to utilise Innovation Fund financed competitive bidding mechanism to scale up manufacturing of critical technology.
For hydrogen, a first auction – or competitive bid - with an indicative budget of EUR 800 million will be launched in 2023 to support renewable hydrogen production. Winners of this auction will receive a fixed premium for each kg of renewable hydrogen produced over a period of 10 years. According to the GDIP, this will have a similar impact as the production tax credit in the US IRA, the difference being that the premium, based on the received bids, will make EU support cost-effective, fast and administratively light.
The Commission is looking to extend this process to scaling up manufacturing of components for solar and wind energy, batteries and electrolysers (where the Innovation Fund support would take the form of a production subsidy).
Lastly, a new flagship proposal is the establishment of a European Sovereignty Fund (more info to be revealed later this year) to preserve a European edge on critical and emerging technologies relevant to the green and digital transitions, from computing-related technologies, including microelectronics, quantum computing, and artificial intelligence, to biotechnology and biomanufacturing and net-zero technologies.
Aside from mentioning the importance of private funding, the GDIP includes very little tangible information on increasing private funding into net-zero technology and manufacturing. The Commission’s primary aim is to establish a fully developed Capital Markets Union along the lines of the 2020 CMU Action Plan - a massive project. The Commission believes that a fully developed CMU - together with the EU sustainable finance disclosure framework - will facilitate and drive investments in the green economy.
Enhancing the labour force
The GDIP acknowledges the need to ensure that Europe has the labour force to meet the demands of the green industry. On a high level, the intention is to do this by:
Up- and re-skilling the labour force, especially in relation to renewable energy, raw materials, hydrogen and solar technologies, energy efficiency and heat pumps.
Validation, attraction and import of skilled labour (particularly within STEM). This includes fast tracks for recognition of qualifications and facilitated access of third-country nationals to EU labour markets in priority sectors.
As for financial support, the GDIP proposes to adapt state aid rules to allow more state aid for training (in SMEs in general and for specific key technologies in particular). Interestingly, the Commission also wants to explore the treatment of training expenditure by companies as an investment rather than an expense or operating cost, which could have significant balance sheet effects. There is also substantial EU funding made available under several projects - for example, EUR 5.8 billion available for green skills and jobs through the European Social Fund + (ESF+).
Supporting international trade (but fighting unfair practices)
The GDIP lists free trade initiatives and agreements as imperative for the green transition. In addition to cooperation through WTO, bilateral trade agreements and initiatives such as Global Gateway, the Commission specifically mentions the EU-US cooperative work to limit the negative impacts of the IRA on European industry.
For new initiatives, the EU will look into creating a Critical Raw Materials Club (amazing name), to bring together raw material 'consumers' and resource-rich countries to ensure global security of supply through a competitive and diversified industrial base.
While promoting free trade with third countries around the world, the GDIP also stresses that the EU is and should be ready to fight against unfair and distortive trade practices, and notes that it will use a number of tools to combat what it sees as unfair conduct:
The EU will increase its focus on defending Europe from unfair trade practices like dumping and distortive subsidies, using so-called trade defence instruments (TDI);
The Regulation on Foreign Subsidies (“FSR”) entered into force on 12 January 2023 and provides an additional tool to investigate subsidies granted by third countries;
The EU will specifically work to identify and address distortive subsidies or unfair trading practices relating to IP theft or forced technology transfer in non-market economies, such as China.
Lastly, the EU will review and assess the current rules for screening of foreign direct investments in European companies to safeguard key European assets and protect collective security.
Takeaways for climate tech companies and founders
As illustrated, the GDIP includes a LOT of initiatives and proposals for new legislation. But what effects will it actually have for climate tech companies and founders operating out of Europe? We have broken out 5 practical takeaways:
Simplified regulations: For scaleups in priority sectors, simplified and speedy regulatory and permitting processes can be a game changer (but it remains to be seen who it will affect and how). Also - standardisation means lower barriers to entry and more opportunities for new market entrants and disruptors.
Loosening of state aid rules: If the floodgates for state aid are (at least somewhat) opened, we will likely see very different funding levels, tax breaks and similar incentives being available in different European countries. Companies will be able to plan ahead and think about where to establish and expand to ensure that they can take advantage.
EU funding galore: The combination of available grants, loans, guarantees, auctions, and new a sovereignty fund means that there are hundreds of billions of euros available for scaling industrial manufacturing.
Access to a skilled labour force: If played right, this should improve EU climate companies access to the best global talents and experts.
Continued focus on foreign investments: Green technology is coupled with huge geopolitical and security concerns. Founders should be aware that the number of foreign investments in energy-related, net-zero and climate tech companies that will be scrutinised before being approved is most likely to vastly increase over the coming years. Even if it’s unlikely that a significant number of deals will be blocked, this will affect timing and force both companies and investors to disclose confidential information.